It has been another volatile week for crypto markets, following key inflation data and central bank meetings.
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It has been another volatile week for crypto markets, following key inflation data and central bank meetings. On an annual basis, headline US CPI fell to +4.0% (+0.1% MoM) while core CPI, which excludes the volatile food and energy components, came in at +5.3% (+0.4% MoM). US inflation at the wholesale level also cooled; PPI came in at +1.1% YoY (-0.3% MoM). Meanwhile, the Federal Reserve (Fed) paused rate hikes for the first time in 15 months while the European Central Bank (ECB) hiked rates by 25bps. Elsewhere, Blackrock, the world’s largest asset manager, filed for a spot bitcoin ETF.
Inflation is still high and stable with used car price inflation remaining high, shelter inflation virtually unchanged, and services excluding shelter inflation accelerating.
Markets continue to underprice the Fed. The Fed tried to offset its inaction against high inflation by lifting the dots by 50bps. This lacks credibility as Fed Chair Jerome Powell offered an unconvincing economic narrative. We see two more hikes likely in July and November, more hawkish than the market has priced.
Two more hikes may not be negative for risk assets as they would not slow growth or inflation much. Moreover, market inflation expectations remaining stable in the presence of a predictable, and overall, dovish Fed, would be supportive of risk assets.
Performance of Our Indices
This week, all indices are in the red with our Bitcoin Index (-3.6% WoW) down the least and our Metaverse Index (-17.5% WoW) down the most.
Our DeFi Index is most correlated to our Bitcoin Index (+80%). Our Smart Contract Index trails behind (+78%). Meanwhile, our Metaverse Index and Privacy Index are correlated the least (+75% and +70%, respectively; Chart 3).
Macro correlations flip to negative, with bitcoin now negatively correlated to 10Y yields (-21%, last month: +37%), S&P 500 (-14%, last month: +39%), Nasdaq (-4%, last month: +34%), and oil (-20%, last month: +15%). Meanwhile, it remains marginally positively correlated to gold (+5%, last month: +9%).
- Smart Contract Platform Index: All cryptocurrencies in this index experienced declines as Terra Luna Classic (LUNC; -6.8% WoW) fell the least while EOS (EOS; -28.2% WoW) fell the most. Ethereum (ETH) is down -9.8% WoW.
- DeFi Index: Maker (MKR; +3.1% WoW) is the only cryptocurrency that made gains in this index while Thorchain (RUNE; -23.8% WoW) was down the most.
- Metaverse Index: Declines across the board with Phantasma (SOUL; -5.4% WoW) down the least and RedFOX Labs (RFOX; -31.5% WoW) down the most.
- Privacy Index: Decred (DCR; +3.6% WoW) made gains while all other cryptocurrencies were in the red with Dusk Network (DUSK; -24% WoW) down the most.
- Bitcoin Index: is down -3.6% WoW.
What Are in the Four Indices?
Here are the indices in more detail:
- Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.
- Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
- Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).
- Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
- Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).